Warranty and Indemnity Insurance
Warranty and indemnity insurance is a policy, usually bought by the buyer, that pays for losses from breaches of the warranties a seller gives in a sale agreement — so that the buyer claims against an insurer instead of the seller, and the seller can walk away from the deal with the price and little continuing liability. It has become standard in private equity exits and common in mid-market fintech deals.
- Also known as
- W&I insurance, Representations and warranties insurance, R&W insurance, RWI
- Used at
- arranged during due diligence, bound at signing
- Binding
- a policy between buyer and insurer; the sale agreement is drafted around it
- Typical cover
- 10–30% of enterprise value; premium 1–2% of the limit in Europe, higher in the US
- Excess
- 0.5–1% of enterprise value, often dropping to nil after a period
- Excluded
- known issues, forward-looking statements, and in fintech often regulatory fines and safeguarding
How warranty and indemnity insurance works in practice
Without insurance, a seller's warranties are backed by the seller — capped at a percentage of the price, held in escrow, and claimable only by suing the people the buyer may now employ. Warranty and indemnity insurance moves that exposure to an insurer. The seller's liability under the agreement is reduced to a nominal sum, the escrow shrinks or disappears, and the buyer claims from the policy for a breach of any covered warranty. The seller gets a clean exit; the buyer gets a solvent counterparty; the insurer gets a premium and, in effect, underwrites the due diligence.
That last point decides what the policy is worth. The insurer reads the buyer's diligence reports and the data room and excludes what it does not like: anything the reports identified as a risk, anything the diligence did not cover, and, in fintech, a standard list — regulatory fines and penalties, safeguarding shortfalls, data-protection breaches, sanctions. A buyer that wants those covered needs a specific indemnity from the seller or an escrow, which is where escrow survives even in insured deals.
The process runs alongside the deal: a broker takes the draft agreement and the diligence to several insurers, the chosen insurer underwrites for two to three weeks, and the policy is bound at signing with the final agreement and the disclosure letter attached.
Example
A private equity fund sells a regtech company for €60m. The buyer takes a warranty and indemnity policy with a €12m limit (20% of enterprise value) for a premium of €180,000 (1.5%), with an excess of €300,000 dropping to nil after 12 months. The seller's liability under the agreement is capped at €1, and there is no escrow. The insurer excludes a GDPR complaint identified in the data room; the buyer negotiates a separate €500,000 indemnity from the seller for it, held in a small escrow. Eight months after completion a customer contract turns out to be terminable on change of control, a breach of the contracts warranty; the buyer recovers €740,000 from the insurer.
Common mistakes
- Buying the policy without reading the exclusions, and discovering the fintech risks it never covered. - Skimping on diligence because "the insurer will pay" — the insurer excludes what was not diligenced. - Late uploads to the data room, which the insurer will not cover because it has not seen them. - Sellers who assume the policy replaces all liability: fraud and known issues stay with them. - Forgetting the excess, which turns a €200,000 claim into no claim at all.